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Stochastic Skew In Currency Options
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Book Synopsis Stochastic Skew in Currency Options by : Peter Carr
Download or read book Stochastic Skew in Currency Options written by Peter Carr and published by . This book was released on 2008 with total page 65 pages. Available in PDF, EPUB and Kindle. Book excerpt: We document the behavior of over-the-counter currency option prices across moneyness, maturity, and calendar time on two of the most actively traded currency pairs over the past eight years. We find that the risk-neutral distribution of currency returns is relatively symmetric on average. However, on any given date, the conditional currency return distribution can show strong asymmetry. This asymmetry varies greatly over time and often switch directions. We design and estimate a class of models that capture these unique features of the currency options prices and perform much better than traditional jump-diffusion stochastic volatility models.
Book Synopsis Stochastic Skew in Currency Options by : Liuren Wu
Download or read book Stochastic Skew in Currency Options written by Liuren Wu and published by . This book was released on 2006 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: We document the behavior of over-the-counter currency option prices across moneyness, maturity, and calendar time on two of the most actively traded currency pairs over the past eight years. We find that on any given date, the conditional risk-neutral distribution of currency returns can show strong asymmetry. This asymmetry varies greatly over time and often switches signs. We develop and estimate a class of models that captures this stochastic skew behavior. Model estimation shows that our stochastic skew models significantly outperform traditional jump-diffusion stochastic volatility models both in-sample and out-of-sample.
Book Synopsis Stochastic Risk Premiums, Stochastic Skewness in Currency Options, and Stochastic Discount Factors in International Economies by : Peter Carr
Download or read book Stochastic Risk Premiums, Stochastic Skewness in Currency Options, and Stochastic Discount Factors in International Economies written by Peter Carr and published by . This book was released on 2011 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop models of stochastic discount factors in international economies that produce stochastic risk premiums and stochastic skewness in currency options. We estimate the models using time-series returns and option prices on three currency pairs that form a triangular relation. Estimation shows that the average risk premium in Japan is larger than that in the US or the UK, the global risk premium is more persistent and volatile than the country-specific risk premiums, and investors respond differently to different shocks. We also identify high-frequency jumps in each economy, but find that only downside jumps are priced. Finally, our analysis shows that the risk premiums are economically compatible with movements in stock and bond market fundamentals.
Book Synopsis The Volatility Smile by : Emanuel Derman
Download or read book The Volatility Smile written by Emanuel Derman and published by John Wiley & Sons. This book was released on 2016-09-06 with total page 528 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Volatility Smile The Black-Scholes-Merton option model was the greatest innovation of 20th century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new models that try to reconcile theory with markets. The Volatility Smile presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it. It is also a book about the principles of financial valuation and how to apply them. Celebrated author and quant Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and their assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Topics covered include: The principles of valuation Static and dynamic replication The Black-Scholes-Merton model Hedging strategies Transaction costs The behavior of the volatility smile Implied distributions Local volatility models Stochastic volatility models Jump-diffusion models The first half of the book, Chapters 1 through 13, can serve as a standalone textbook for a course on option valuation and the Black-Scholes-Merton model, presenting the principles of financial modeling, several derivations of the model, and a detailed discussion of how it is used in practice. The second half focuses on the behavior of the volatility smile, and, in conjunction with the first half, can be used for as the basis for a more advanced course.
Book Synopsis Currency Options and Exchange Rate Economics by : Zhaohui Chen
Download or read book Currency Options and Exchange Rate Economics written by Zhaohui Chen and published by World Scientific. This book was released on 1998 with total page 224 pages. Available in PDF, EPUB and Kindle. Book excerpt: This volume is a collection of classical and recent empirical studies of currency options and their implications for issues of exchange rate economics, such as exchange rate risk premium, volatility, market expectations, and credibility of exchange rate regimes. It contains applications on how to extract useful information from option market data for financial forecasting policy purposes. The subjects are discussed in a self-contained, user-friendly format, with introductory chapters on currency option theory and currency option markets. The book can be used as supplementary reading for graduate finance and international economics courses, as training material for central bank and regulatory authorities, or as a reference book for financial analysts.
Book Synopsis Pricing Volatility Options Under Stochastic Skew with Application to the VIX Index by : Jacinto Marabel Romo
Download or read book Pricing Volatility Options Under Stochastic Skew with Application to the VIX Index written by Jacinto Marabel Romo and published by . This book was released on 2015 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: In recent years there has been a remarkable growth of volatility options. In particular, VIX options are among the most actively trading contracts at CBOE. These options exhibit upward sloping volatility skew and the shape of the skew is largely independent of the volatility level. To take into account these stylized facts, this article introduces a novel two-factor stochastic volatility model with mean reversion that accounts for stochastic skew consistent with empirical evidence. Importantly, the model is analytically tractable. In this sense, I solve the pricing problem corresponding to standard-start, as well as to forward-start European options through the Fast Fourier Transform.To illustrate the practical performance of the model, I calibrate the model parameters to the quoted prices of European options on the VIX index. The calibration results are fairly good indicating the ability of the model to capture the shape of the implied volatility skew associated with VIX options.
Book Synopsis Stochastic Interest Rates by : Daragh McInerney
Download or read book Stochastic Interest Rates written by Daragh McInerney and published by Cambridge University Press. This book was released on 2015-08-13 with total page 171 pages. Available in PDF, EPUB and Kindle. Book excerpt: Designed for Master's students, this practical text strikes the right balance between mathematical rigour and real-world application.
Book Synopsis Pricing Forward Skew Dependent Derivatives by : Jacinto Marabel Romo
Download or read book Pricing Forward Skew Dependent Derivatives written by Jacinto Marabel Romo and published by . This book was released on 2014 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: Empirical evidence shows that, in equity options markets, the slope of the skew is largely independent of the volatility level. Single-factor stochastic volatility models are not flexible enough to account for the stochastic behavior of the skew. On the other hand, multifactor stochastic volatility models are able to account for the existence of stochastic skew. This study studies the effects of introducing stochastic skew in the valuation of forward skew dependent exotic options. In particular, I consider cliquet, as well as reverse cliquet structures. The study also derives a semi-closed-form solution for the price of forward-start options under the multifactor stochastic specification. The empirical results indicate that the consideration of additional volatility factors in the context of stochastic volatility models allows us to generate more flexible smile patterns. This additional flexibility has a relevant impact on the valuation of forward skew dependent derivatives. In this sense, this study shows that similar calibrations of single factor and multifactor stochastic volatility models to the current market prices of plain vanilla options can lead to important discrepancies in the pricing of exotic forward skew dependent derivatives such as regular cliquet structures and reverse cliquet options.
Book Synopsis Pricing Foreign Currency Options with Stochastic Volatility by : Melino, Angelo
Download or read book Pricing Foreign Currency Options with Stochastic Volatility written by Melino, Angelo and published by . This book was released on 1988 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Foreign Exchange Option Pricing by : Iain J. Clark
Download or read book Foreign Exchange Option Pricing written by Iain J. Clark and published by John Wiley & Sons. This book was released on 2011-10-20 with total page 308 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book covers foreign exchange options from the point of view of the finance practitioner. It contains everything a quant or trader working in a bank or hedge fund would need to know about the mathematics of foreign exchange—not just the theoretical mathematics covered in other books but also comprehensive coverage of implementation, pricing and calibration. With content developed with input from traders and with examples using real-world data, this book introduces many of the more commonly requested products from FX options trading desks, together with the models that capture the risk characteristics necessary to price these products accurately. Crucially, this book describes the numerical methods required for calibration of these models – an area often neglected in the literature, which is nevertheless of paramount importance in practice. Thorough treatment is given in one unified text to the following features: Correct market conventions for FX volatility surface construction Adjustment for settlement and delayed delivery of options Pricing of vanillas and barrier options under the volatility smile Barrier bending for limiting barrier discontinuity risk near expiry Industry strength partial differential equations in one and several spatial variables using finite differences on nonuniform grids Fourier transform methods for pricing European options using characteristic functions Stochastic and local volatility models, and a mixed stochastic/local volatility model Three-factor long-dated FX model Numerical calibration techniques for all the models in this work The augmented state variable approach for pricing strongly path-dependent options using either partial differential equations or Monte Carlo simulation Connecting mathematically rigorous theory with practice, this is the essential guide to foreign exchange options in the context of the real financial marketplace.
Book Synopsis Anchoring Heuristic and Currency Options by : Hammad Siddiqi
Download or read book Anchoring Heuristic and Currency Options written by Hammad Siddiqi and published by . This book was released on 2016 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: Based on experimental evidence, I adjust the standard currency option pricing models for the anchoring heuristic of Tversky and Kahneman (1974). Anchoring provides an explanation for the market practice of using risk-reversals as sentiment proxy. While generating currency smiles even with geometric Brownian motion, anchoring adds power to stochastic volatility and jump diffusion approaches. In particular, anchoring mitigates the difficulty that stochastic volatility models face in generating a steep short-term skew. Anchoring predicts that the slope of the smile is positively related to underlying currency sentiment, whereas curvature is positively related to dispersion in the sentiment. Empirical evidence supports these predictions.
Author :Antoine Petrus Cornelius van der Ploeg Publisher :Rozenberg Publishers ISBN 13 :9051705778 Total Pages :358 pages Book Rating :4.0/5 (517 download)
Book Synopsis Stochastic volatility and the pricing of financial derivatives by : Antoine Petrus Cornelius van der Ploeg
Download or read book Stochastic volatility and the pricing of financial derivatives written by Antoine Petrus Cornelius van der Ploeg and published by Rozenberg Publishers. This book was released on 2006 with total page 358 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Implied Exchange Rate Distributions by : José Campa
Download or read book Implied Exchange Rate Distributions written by José Campa and published by . This book was released on 1997 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses a rich new data set of option prices on the dollar-mark, dollar-yen, and key EMS cross-rates to extract the entire risk-neutral probability density function (pdf) over horizons of one and three months. We compare three alternative smoothing methods--cubic splines, an implied binomial tree (trimmed and untrimmed), and a mixture of lognormals--for transforming option data into the pdf. Despite their methodological ifferences, the three approaches lead to a similar pdf distinct from the lognormal benchmark, and usually characterized by skewness and leptokurtosis. We then document a striking positive correlation between skewness in these pdfs and the spot rate. The stronger a currency the more expectations are skewed towards a further appreciation of that currency. We interpret this finding as a rejection that these exchange rates evolve as a martingale, or that they follow a credible target zone, explicit or implicit. Instead, this this positive correlation is consistent with target zones with endogenous realignment risk. We discuss two interpretations of our results on skewness: when a currency is stronger, the actual probability of further large appreciation is higher, or because of risk, such states are valued more highly.
Book Synopsis FX Options and Smile Risk by : Antonio Castagna
Download or read book FX Options and Smile Risk written by Antonio Castagna and published by John Wiley & Sons. This book was released on 2010-02-12 with total page 324 pages. Available in PDF, EPUB and Kindle. Book excerpt: The FX options market represents one of the most liquid and strongly competitive markets in the world, and features many technical subtleties that can seriously harm the uninformed and unaware trader. This book is a unique guide to running an FX options book from the market maker perspective. Striking a balance between mathematical rigour and market practice and written by experienced practitioner Antonio Castagna, the book shows readers how to correctly build an entire volatility surface from the market prices of the main structures. Starting with the basic conventions related to the main FX deals and the basic traded structures of FX options, the book gradually introduces the main tools to cope with the FX volatility risk. It then goes on to review the main concepts of option pricing theory and their application within a Black-Scholes economy and a stochastic volatility environment. The book also introduces models that can be implemented to price and manage FX options before examining the effects of volatility on the profits and losses arising from the hedging activity. Coverage includes: how the Black-Scholes model is used in professional trading activity the most suitable stochastic volatility models sources of profit and loss from the Delta and volatility hedging activity fundamental concepts of smile hedging major market approaches and variations of the Vanna-Volga method volatility-related Greeks in the Black-Scholes model pricing of plain vanilla options, digital options, barrier options and the less well known exotic options tools for monitoring the main risks of an FX options’ book The book is accompanied by a CD Rom featuring models in VBA, demonstrating many of the approaches described in the book.
Book Synopsis The Pricing of Currency Options with Stochastic Volatilities by : Ghulam Sarwar
Download or read book The Pricing of Currency Options with Stochastic Volatilities written by Ghulam Sarwar and published by . This book was released on 1997 with total page 184 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Relationships Between Foreign Exchange Volatility Skew and Jump Risk by : Chia Rui Ming Daryl
Download or read book The Relationships Between Foreign Exchange Volatility Skew and Jump Risk written by Chia Rui Ming Daryl and published by . This book was released on 2014 with total page 14 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this novel study, I investigate whether option implied volatility and implied volatility skew contain information capable of elucidating, in an ex-ante manner, the probability of exceptional foreign exchange price fluctuations. I study four of the most widely traded currency pairs and their corresponding options over varying option maturities and distinct definitions of volatility skew and price jumps, each over the period 1 Jan 2007 to 18 November 2013. I find significant evidence of such informational content in at-the-money implied volatility, implied volatility skew and currency forward premium, each with differing degrees of influence. Further, as opposed to results in existing literature on price jumps within the equity asset class, the ability of volatility skew to predict price jumps does not attenuate with an increasing option maturity up to three months. I also observe through probit marginal analysis how at-the-money implied volatility dominates in its influence of price jump probability, while currency carry and implied volatility skew hold smaller but nonetheless significant influence.
Book Synopsis FX Barrier Options by : Zareer Dadachanji
Download or read book FX Barrier Options written by Zareer Dadachanji and published by Springer. This book was released on 2016-04-29 with total page 274 pages. Available in PDF, EPUB and Kindle. Book excerpt: Barrier options are a class of highly path-dependent exotic options which present particular challenges to practitioners in all areas of the financial industry. They are traded heavily as stand-alone contracts in the Foreign Exchange (FX) options market, their trading volume being second only to that of vanilla options. The FX options industry has correspondingly shown great innovation in this class of products and in the models that are used to value and risk-manage them. FX structured products commonly include barrier features, and in order to analyse the effects that these features have on the overall structured product, it is essential first to understand how individual barrier options work and behave. FX Barrier Options takes a quantitative approach to barrier options in FX environments. Its primary perspectives are those of quantitative analysts, both in the front office and in control functions. It presents and explains concepts in a highly intuitive manner throughout, to allow quantitatively minded traders, structurers, marketers, salespeople and software engineers to acquire a more rigorous analytical understanding of these products. The book derives, demonstrates and analyses a wide range of models, modelling techniques and numerical algorithms that can be used for constructing valuation models and risk-management methods. Discussions focus on the practical realities of the market and demonstrate the behaviour of models based on real and recent market data across a range of currency pairs. It furthermore offers a clear description of the history and evolution of the different types of barrier options, and elucidates a great deal of industry nomenclature and jargon.
